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The London Market and other insurers who underwrite D&O exposures in the United States have been following the appeal to the United States Supreme Court with considerable interest.

The decision is important because the Supreme Court was asked to opine on an argument that, if successful, would significantly reduce the number and size of many securities class actions brought in the US.

The principle of law at stake was the “fraud-on-the-market” theory which allows class action plaintiff attorneys to rely on a rebuttable legal presumption that if the allegedly “fraudulent” statement(s) is publicly available information, it was relied on by all potential members of the class action.

Many commentators were favouring a result which amounted to a “compromise” by the Supreme Court which neither left the “fraud-on-the-market” theory wholly untouched, nor removed it entirely.

The defendant’s primary argument failed and the “fraud-on-the-market” theory remains intact. However, the Supreme Court has ruled that the defendant(s) should be allowed to rebut the presumption of reliance at the class-certification stage by introducing evidence that the alleged misrepresentations did not distort the market price of its stock. It may in consequence be possible for defendants to fend off class certification with arguments supported by evidence which can demonstrate that any drop in share price was attributable to something other than their supposed fraudulent statement(s).

CommentA defendant has always been able to rebut the presumption and defend a claim on the basis that the alleged fraudulent statement(s) had no material impact on the share price (and therefore, there was no reliance by the market, and hence by the claimants, on the allegedly fraudulent statements when trading shares in the defendant company). However, allowing defendants to pursue such arguments at the earlier stage of class certification is significant in practical terms.

A number of unmeritorious claims will be weeded out at an early stage, others will be discouraged. For many cases, there will be a front loading of costs with expert evidence and early discovery, and settlement strategies will change for both plaintiffs and defendants. A previous complaint of defendants was that the price of settlement rose significantly once class certification had been allowed. The practical implications of this important decision will be played out in the courts in the coming years but we expect defendants and their insurers to benefit from a reduction in financial terms in overall exposure to D&O class actions in the US.

Whether an extension of cover under D&O policies is necessary to cover the costs of challenging class certification at an earlier stage is questionable, and will very much depend on the policy wording in place. However, insureds listed in the US will want comfort that their policies will respond to all costs incurred.

Indeed, prior to the Halliburton decision being handed down, at least one D&O insurer had already introduced an endorsement providing that no retention is applicable to the costs incurred by an event study, at no additional premium.

There may be other developments along these lines as the market responds to this important decision